Abstract

In a bank / company report, the level of information and understanding
of what is happening in the company is inevitably incomparable between
a banker and a company executive. This difference largely explains
the difference of opinion between the two parties. After a long hiatus,
research has massively focused on explaining the different aspects of
the relationship between the bank and the company. Indeed, the theory
of financial intermediation has evolved considerably in recent years
following the integration of information asymmetry problems. Banks
have particular expertise in valuing businesses, making them more
suitable than other creditors to select and control borrowers. Such
superiority of banks is attributed to the Bank-Enterprise relationship,
which is now a crucial element in the elimination of asymmetric
information problems and the reduction of the scale of risk. This study is
motivated by the lack of consensus on the role of the Bank - Enterprise
relationship in disclosing information. More specifically, the major
concern of this paper is to bring out, through the literature, the impact of
the bank / enterprise relationship on information asymmetry.

Keywords

Abstract

In a bank / company report, the level of information and understanding
of what is happening in the company is inevitably incomparable between
a banker and a company executive. This difference largely explains
the difference of opinion between the two parties. After a long hiatus,
research has massively focused on explaining the different aspects of
the relationship between the bank and the company. Indeed, the theory
of financial intermediation has evolved considerably in recent years
following the integration of information asymmetry problems. Banks
have particular expertise in valuing businesses, making them more
suitable than other creditors to select and control borrowers. Such
superiority of banks is attributed to the Bank-Enterprise relationship,
which is now a crucial element in the elimination of asymmetric
information problems and the reduction of the scale of risk. This study is
motivated by the lack of consensus on the role of the Bank - Enterprise
relationship in disclosing information. More specifically, the major
concern of this paper is to bring out, through the literature, the impact of
the bank / enterprise relationship on information asymmetry.

Keywords

Introduction

Strategic marketing is the essential tool to accomplish the assigned
objectives, especially in the banking sector. It remains the best answer to
the mutations drained by multiple crises, changes in consumption habits,
and changes in the socio-economic environment. Indeed, it proposes
solutions, and supports the decision-makers to avoid any hasty decision
making, which may incur significant medium or long-term risks for the
bank.

In addition, it aims to build customer loyalty by progressive
satisfaction, including establishing a customer relationship, win-win
impregnated by confidence.

Faced to increased competition among banking operators, especially
in the Moroccan monopolistic context, banks are concerned about their
performance and obviously their sustainability, pay particular attention
to the relationship bank/enterprise.

The 7th edition of the Deloitte Bank and Client Relations Study in
2017 emphasizes on the importance of the relationship aspect [1]. Indeed, the report shows that 66% of corporate customers
trust their bank through the relationship established with
their bankers. In this context, the banks seem to control,
through the management of the customer relationship CRM,
the risk of attrition. This is not the only obstacle that the
relationship helps to overcome. So it is, modern banking
theory considers it as an endogenous response to the
imperfections and incompleteness of the financial markets.
A good customer relationship allows the bank, in addition
to loyalty, to mitigate information asymmetry. This gives the
creditor, by allowing him to develop specific procedures for
the acquisition of information on the borrowers, appreciable
comparative information on the potential competitors, since
he puts at his disposal a “capital knowledge” which comes to
flesh out his intangible asset.

In this paper, we try to provide, through the literature, an
explanation of the link between the customer relationship
in the banking industry and information asymmetry. We
will first discuss the informational asymmetry as supported
by the bank and the client company, and we will look in the
second place at the preponderant role of a good customer
relationship.

Information Asymmetry: A Dreadful Firewall
Dismantled

In the Maghreb, the SME is the core of the economic
network. This entrepreneurial category represents a
powerful growth and employment engine [2,3]. These
companies are insufficiently equipped with their own funds,
and are therefore faced with an urgent increase in working
capital requirements. The best solver of this strain is the
banking network, the head of company inevitably goes there
for a line of cash at the height of its cycle of activity, or in the
long term, to solicit a financing of its projects investment. This
explains the heavy reliance of SMEs on banks; a dependency
that increases more and more with informational opacity.
This retention of information can sometimes be a result of
the fragility of the information system of SMEs, especially
at an early stage of their entrepreneurship life. Indeed,
the information advantage of the banks is practically nil at
the time of the opening of a credit file, and all the more so
since the customer’s past as a borrower is recent. It is then
virtually impossible to draw reliable information on the
ability and willingness of the client to pay interest and repay
capital from the analysis of the history of his previous debt.
The superiority of banking knowledge is therefore almost
exclusively based on the information acquired once the
credit relationship is engaged.

Many times, retention may be related to the leader’s
information disclosure behavior. This being said, the client
can sometimes also be victim of information asymmetry. We
will give more details in the second part of this paragraph.

The entrepreneurial client, actor of information
asymmetry

In a bank/business relationship, the quantity and
quality of information obtained depends on the nature of
the relationship between the bank and the customer [4].
Considering the previous researches, there is a profound

influence of managerial behavior on management methods
and accounting practices, especially in SMEs [5-7]. Therefore,
the banker is supposed to bear in mind the importance
that the manager gives to accounting information, when
evaluating a request for financing. Thus, based on the
principle that attitudes can explain behavior, in accordance
with the theory of planned behavior [8], we state that the
degree of utility of accounting information in making
decisions announced by the manager may have an impact on
the bank credit agreement process. This idea was confirmed
by the study of Nkhili and Derbel [9]. In fact, the probability
of obtaining credits is higher when the managers transmit
all the necessary accounting documents, namely the balance
sheet, the income statement and the statement of cash flows.

However, the bank has a superior knowledge, particularly
because of its ability to produce private information of both
objective and subjective nature specific to each borrower.
This faculty is made possible by the decentralization of
loan decisions, up to a customer relations officer, when
the amount of the commitments is not considered very
important. To base a decision to grant credit, the banker is
supposed to collect all information relating to the client, and
the characteristic and perspective of his project to finance.
Revealing this type of information is done through the
confidentiality and integrity services that banks guarantee
to their customers. That being said, once disclosed, this
information, which will facilitate the granting of credit,
may fall back into a competitor’s information system, thus
posing a threat to the client company, and consequently to
an informational comparative advantage and sometimes
strategic.

In addition, the second problem raised by the disclosure
of private information lies in the risk for the client to see
the financier undertake the project himself. Casson [10]
summarizes this risk as follows: “The client needs the
lender, but once the lender has the information, he no
longer needs the client”. Here again, the bank establishes a
reputation of integrity by committing itself not to exploit on
its own account the information received from its customers.
Lending transactions on new clients that the bank can attract
by honoring its financial commitments have a greater longterm
value than the gains that can be realized in the short
term by not respecting them.

However, the customer could sometimes find himself,
victim of retention of information from his bank.

The other side of the medal: the client as victim of
informational asymmetry

Usually, in the banking sphere, providing services
suggests a meeting between a client with only a summary
knowledge of the services offered, and an expert agent in
banking. From this divergence of expertise, flows a source of
information asymmetry.

The asymmetry experienced by the client in the behavior
of his bank is rarely analyzed in the economic literature.
Many times, the customer cannot predict with certainty
whether his bank will renew his credit and under what
conditions. For its part, the bank, thus in a position of power, finds it more thoughtful not to disclose its intentions, in
order to guard against any opportunistic behavior on the
part of its debtor. Faced with this risk of rationing and rates,
a customer may be encouraged to engage in a long-term
relationship with a bank.

Indeed, in a series of articles, Hoshi et al. [11], find,
for a sample of Japanese clients, that those with close and
long-term ties to a major bank have more flexible liquidity
constraints than other. In addition, clients in the first group
invest more in times of financial difficulty than those in the
second group, suggesting again that long-term relationships
with banks allow clients to overcome, at least in part, the
difficulties associated with access to loanable funds.

The customer relationship: the strategic miraculous
tool

Customer relationship: antidote of asymmetry:
Confronted with the informational fire-wall, the bank must
develop more rigorous control capacities, and equip itself
with advanced technological tools, in order to rationally
decide in terms of financing viable firms, but whose
accounting documents and management are obscure
(Watanabe, 2004). However, the information conundrum
dissolves as confidence is built up, which in financial terms
stipulates long-term credit relationships, which provide
greater visibility into the behavior, business prospects,
their financial positions, and especially their solvency. And
this is precisely why the bank / borrower report plays a
convincing role in the SME credit agreement [12]. A longterm
credit relationship allows a better understanding of the
customer, benefits both parties: it facilitates the acquisition
of information for the banker, and therefore gives the
customer greater availability with a lower interest rate.

This leads us to highlight the importance of relationship
between the banker and the entrepreneur. According to
Boot [13], it is a mutual commitment based on trust and
respect. As for Bink and Ennew [14], they define it as a
partnership relationship, identified on the one hand by the
nature of the contract established between the two parties
and the willingness of the manager to share the management
information, and on the other hand, by the understanding,
advice and support provided by the banker. In this context
the agency theory of Jensen and Meckling [15], finds
legitimately all its meaning.

According to the report that Marseillaise society of
credit - MSC - has published in 2004 [16], entrepreneurial
clients have, in addition to the file rating, a customer score,
calculated monthly on the basis of:

Deposits and credits

Nature of the client: age, CSP, segmentation, etc.

Risks noted: unpaid, ATD, etc.

The rating is prior to the granting of credit, the comments
of managers and decision-makers will have to give all
necessary explanations when the decision will not be in
line with the note. According to the MSC, one of the decisive
elements of the behavioral variable included in the notation
is “seniority-relationship”.

Duration is an important dimension of a relationship.
From the moment a bank builds a credit report, it will
be all the more incentive to classify the customer in the
category of “good” borrowers when the number of credits
that he has repaid without problem will be high. Indeed, a
bank is able to build a statistical test for honest borrowers,
based on past relationships with clients. To gain such a
reputation is to develop a benefit for the customer, because
over time, banks are more likely to finance borrowers than
projects. Moreover, the time factor allows the bank to know
customers more subjectively. Weaving lasting personalized
relationships allows the banker to get an idea of the quality of
his client, and therefore to better assess the credit risk, since
the success of an investment does not only depend on the
quality of the project, but also of the one who implements it.

As mentioned above, the banks develop, by the CRM,
information specific to each borrower. It is nevertheless
important to question the influence of the superiority of
banking knowledge in terms of establishing customer
[17,18] confirm this, and emphasize the dynamic aspect of
customer relations. According to them, a bank that lends
to a customer learns more about its quality as a borrower
than any other bank. From this perspective, this type
of relationship is perceived as an endogenous process.
Internalized information, generated by the multiplicity of
interactions over time and between different products, is
indeed at the heart of customer-bank relationships.

Typology of customer relationship in the bank: In the
banking sector, providing services, confronts often a client and
an expert. This exchange is fundamentally dissymmetrical.
However, the increased search for profitability hampers copiloting
when customers have profiles that banks are not
looking for. This then translates into types of relationships
that harm the interests of one party or the other (more often
the client) when it is not both. It is precisely these difficulties
that fuel the process of bank exclusion.

Except the proximity relations where the effects of
asymmetry manage to be controlled, three types of relations
can emerge and hinder the establishment of a Guerin quality
co-piloting Guerin (2000) .

A dominant banker: it is a relationship where the
banker monopolizes the expertise and understanding of the
commercial logic, and therefore holds control. The client
thus dominated by the banker submits to his authority both
because he cannot dispute it, but also out of deference to a
dreaded institution. Lack of trust in this type of relationship
can lead to inappropriate behaviors. This type of relationship,
called subjection, creates an imbalance that can cause the
flight of customers, and is gradually called into question.

A client in a position of power: The negotiating skills
of clients with a high cultural, social or economic capital,
enables them to impose themselves in a difficult situation
to be heard, or even to reverse the dissymmetry using the
bank. However, this position of the client depends both on
the credibility of his threat of defection, and his weight in the
portfolio of the banker Hirschman (1982) [19], because the
departure of a client with modest resources only causes a
low economic impact.

Conflictual relationship: describes customers
who want to be heard by their bank without having the
prerequisites necessary for the success of their approach
(mainly the commercial interest). Often, these shortcomings
add to the burden, render them ineffective, and turn them
into an aggressive demand that prevents, if still possible, any
dialogue.

Impact and challenges of the bank / company
relationship: Like any exchange between two parties,
through a coincidence of needs and therefore mutual
satisfaction, a bank / business relationship is a doubleedged
tool. It certainly confers benefits, but does have some
disadvantages.

Beyond the costs inherent in financial intermediation,
bank credit has its own cost endogenously derived from the
supervisory and control functions exercised by the bank
during the customer relationship. The private knowledge
specific to the borrower allows the bank to expropriate
part of the profits of the customers. Indeed, as argued by
Greenbaum et al. (1989), Sharpe (1990) and Rajan (1992)
[20-22], the asymmetry of information on the side of the
supply of bank credits allows a bank to extract information
on its former customers with low risk of default as, unlike
other banks, it knows that the borrower is less risky than the
average. Information rent can be defined as the difference
between the interest rate charged by the bank and the rate
that would cancel out its profit. The anticipation of ex post
informational rents causes ex ante distortions in the amount
of capital invested [21], or the effort exerted by the client [22].
The duplication of monitoring costs then has its advantages.
Rajan (1992) [22] shows that the client’s choice of different
sources of financing and the priorities for repayment can
best circumscribe the information rent of the bank.

A risky relationship: In the Sharpe model, the bank that
credits a customer knows if the project was successful or
failed by receiving a perfect signal on the client’s investment
income. On the other hand, banks not contracting with
a client observe with a risk of error the results of their
activity. Here we find the idea that the customer relationship
allows the bank to develop internal knowledge specific
to the borrower. The stability of customer relationships is
then explained by the fact that good quality customers are
informally captured by their banks. This risk of capture is
particularly present for small customers without much
known quality. Indeed, it seems difficult to imagine that for
large companies, the information available to the creditor
bank or banks is substantially higher than that of other
banks. On the other hand, it seems reasonable to consider
that financial market information on the quality of small
and medium-sized enterprises is not very precise or very
reliable, since the creditor bank certainly has a significant
comparative information advantage compared to other
banks. In addition, if the different banks can observe the
results of the surveillance activities of the other banks, a
“stowaway” behavioral hazard may appear because each
bank can rely on the supervision of the other banks to
assess the credit risk of the banks. the borrower without
having to carry out a monitoring activity themselves. This problem strengthens banks’ incentive to make customer
relationships exclusive and, as a result, increases the risk of
customer capture.

Proposal for a Theoretical Model

In sum, we have tried through the analysis of a dozen
documents published between 1950 and 2017, to trace
the link between the company and its main bank, and
to understand the motivations, the outstanding risks
and the benefits stored by each party considering their
informational authority. Indeed, for the bank, having a data
on its customers represents an asset, or even competitive
advantage [23]. However, a lack of information coming from
the entrepreneur can be fatal. In a situation of asymmetry, or
informational opacity, a bank may, by instinct of prudence,
refuse to establish or deepen its relationship with a client,
having in fact a great potential, and therefore sacrifice profit.
Similarly, a suspicious customer, abstains from disclosing
many of his accounting and financial information, for fear
of capture. Aware of this interdependence between the
company and its bank, we have identified through the
literature the preponderance of a good customer relationship
in order to surpass the information concern.

As mentioned above, the banks develop, by the CRM,
specific information to each borrower. Nevertheless, it is
important to evaluate the influence of the superiority of
banking knowledge in establishing client relationships) [18-
19]. A bank that lends to an enterprise learns more about
its borrower quality than any other bank. We, therefore
propose a two-variable model, explaining an explanatory and
predictive link between the bank/enterprise relationship
(Figure 1), and information asymmetry (the nature, form
and meaning of the link will be studied later).

Figure 1

Bank/enterprise relationship.

Figure 1: Bank/enterprise relationship.

Conclusion

One of the reasons behind bankers’ reluctance is that
the risk they take is unpaid at its proper level. In the same
day, an account manager can work on a file of hotelier,
industrialist, merchant or service provider. He is unable to
master every client’s field activity, especially at the beginning
of his career. This lack of knowledge can sometimes lead
to misunderstanding. In addition to this, there is the lack
of regular and “fresh” information on the evolution of the
company. Most of the time, the banker has to settle for a late
balance sheet (four to six months after the close of the balance
sheet) and episodic oral information to form an opinion on
the financial situation of the company. The banker does not benefit, as the manager, of feedback from the field, access
to the company’s information system, monthly dashboards
or intermediate situations. He does not know the decisions
made, the development of the order book month by month,
the evolution of the market and competition. Difficult, under
these conditions, to “feel”, support, and support the company
[24].

The quality of information improves certainly with
the length of the relationship, but also with the number of
financial services the bank offers its client. Moreover, as
Fama (1985) [25] points out, the role of banks is not limited
to the granting of credit; multi-production/distribution are
even a fundamental attribute of banks. These complementary
financial services (the issue and placement of securities,
market studies and in particular the maintenance and
monitoring of the books of accounts), provide additional
information. On the other hand, the bank can spread its costs
of producing information about the borrower on multiple
products, decreasing the cost of intermediation and thus
helping to increase the funds loaned to the client [26]. This
assumption assumes that the intensity of the Bank-Company
relationship allows a better understanding of the company’s
prospects, its ability to repay, its investment opportunities,
its financial position ... etc. [27]. In general, customer
relationships improve the efficiency and personalization of
the product line, and consequently improve contract terms.

But the question that persists is the following: what is the
future of the banking-business relationship, especially after
the adoption of the new “Basel II” regulation, in a country
like Morocco where relational culture and the informal
character dominate the business community?

Omri A, Bellouma M (2008) The impact of the quality of the Bank-
Company Relationship on the risk premium required of Tunisian
companies. The Journal of Management Sciences n°229: 128. [ Ref ]

Omri A, Bellouma (2004) The grouping of Tunisian small and mediumsized
enterprises’ requests for credit in the context of asymmetric
information. SME International Review: economy and management of
small and medium enterprises 17: 43-63. [ Ref ]